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Externalities in a Model of Perpetual Youth with Age-Dependent Productivity

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  • Wendner, Ronald

Abstract

This paper investigates the effects of (``keeping up with the Joneses'' and ``learning-by-investing'') externalities, when labor productivity decreases with age. Within the framework of a continuous time overlapping generations model, the effects of the consumption externality on the propensity to consume, capital level and individual consumption growth rates are ambiguous and depend on the presence (absence) and sign of the ``generation replacement effect'' (GRE). The sign of the GRE is determined by the rate at which labor productivity declines. Both externalities generate distortions --- even with exogenous labor supply. Depending on the sign of the GRE, in case of a production externality, the consumption externality may raise efficiency by introducing an additional distortion. For a specific rate of labor productivity decline the GRE vanishes. In this case, externalities display the same effects in both a representative agent and the overlapping generations model.

Suggested Citation

  • Wendner, Ronald, 2008. "Externalities in a Model of Perpetual Youth with Age-Dependent Productivity," MPRA Paper 11335, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:11335
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    References listed on IDEAS

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    More about this item

    Keywords

    Externality; labor productivity; overlapping generations; perpetual youth; distortion; growth;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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